QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended September 30, 2003

Commission
File Number

Name of Registrant, State of Incorporation, Address of Principal Executive Offices,
    and Telephone Number    

I.R.S. Employer Identification Number

001-31403

PEPCO HOLDINGS, INC.
("Pepco Holdings," a Delaware
  corporation)
701 Ninth Street, N.W.
Washington, D.C. 20068
Telephone: (202)872-2000

52-2297449

001-01072

POTOMAC ELECTRIC POWER COMPANY
("Pepco," a District of
  Columbia and Virginia
  corporation)
701 Ninth Street, N.W.
Washington, D.C. 20068
Telephone: (202)872-2000

53-0127880

001-13895

CONECTIV
("Conectiv," a Delaware
  corporation)
800 King Street, P.O. Box 231
Wilmington, Delaware 19899
Telephone: (202)872-2000

51-0377417

001-01405

DELMARVA POWER & LIGHT COMPANY
("DPL," a Delaware and
  Virginia corporation)
800 King Street, P.O. Box 231
Wilmington, Delaware 19899
Telephone: (202)872-2000

51-0084283

001-03559

ATLANTIC CITY ELECTRIC COMPANY
("ACE," a New Jersey
  corporation)
800 King Street, P.O. Box 231
Wilmington, Delaware 19899
Telephone: (202)872-2000

21-0398280

333-59558

ATLANTIC CITY ELECTRIC
  TRANSITION FUNDING LLC
("ACE Funding," a New Jersey
  limited liability company)
P.O. Box 15597
Wilmington, Delaware 19850
Telephone: (202)872-2000

51-0408521

Continued

Securities registered pursuant to Section 12(b) of the Act:

Registrant

Title of Each Class

Name of Each Exchange on Which Registered  

Pepco Holdings

Common Stock, $.01 par value

   New York Stock
   Exchange

Pepco

Guarantee by Pepco of the 7-3/8% Trust Originated Preferred Securities issued by Potomac Electric Power Company Trust I

   New York Stock    Exchange

DPL

Guarantee by DPL of the 8.125% Cumulative Trust Preferred Capital Securities of Delaware Power Financing I

   New York Stock
   Exchange

ACE

Guarantee by ACE of the 7-3/8% Cumulative Quarterly Income Preferred Securities, issued by Atlantic Capital II

   New York Stock    Exchange

Securities registered pursuant to Section 12(g) of the Act:

Pepco

Serial Preferred Stock, $50 par value

     Indicate by check mark whether each of the registrants (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X . No    .

     Indicate by check mark whether Pepco Holdings is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes   X  .    No      .

     Pepco, Conectiv, DPL, ACE, and ACE Funding are not accelerated filers.

     Conectiv, DPL, ACE and ACE Funding meet the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore filing this Form 10-Q with reduced disclosure format specified in General Instruction H(2) of Form 10-Q.

Registrant

Number of Shares of Common Stock of the Registrant Outstanding at September 30, 2003

Pepco Holdings

171,383,998 ($.01 par value)

Pepco

100 ($.01 par value) (a)

Conectiv

100 ($.01 par value) (a)

DPL

1,000 ($2.25 par value) (b)

ACE

18,320,937 ($3 par value)(b)

ACE Funding

None (c)

(a)

As of August 1, 2002, all voting and non-voting common equity is owned
  by Pepco Holdings.

(b)

All voting and non-voting common equity is owned by Conectiv.

(c)

All voting and non-voting common equity is owned by ACE.

     THIS COMBINED FORM 10-Q IS SEPARATELY FILED BY PEPCO HOLDINGS, PEPCO, CONECTIV, DPL, ACE, AND ACE FUNDING. INFORMATION CONTAINED HEREIN RELATING TO ANY INDIVIDUAL REGISTRANT IS FILED BY SUCH REGISTRANT ON ITS OWN BEHALF. EACH REGISTRANT MAKES NO REPRESENTATION AS TO INFORMATION RELATING TO THE OTHER REGISTRANTS.

TABLE OF CONTENTS

Page

PART I

FINANCIAL INFORMATION

  Item 1.

-

Financial Statements

1

  Item 2.

-

Management's Discussion and Analysis of
   Financial Condition and Results of
   Operations

97

  Item 3.

-

Quantitative and Qualitative Disclosures
   About Market Risk

170

  Item 4.

-

Controls and Procedures

170

PART II

OTHER INFORMATION

  Item 1.

-

Legal Proceedings

173

  Item 2.

-

Changes in Securities and Use of Proceeds

176

  Item 3.

-

Defaults Upon Senior Securities

176

  Item 4.

-

Submission of Matters to a Vote of Security Holders

176

  Item 5.

-

Other Information

176

  Item 6.

-

Exhibits and Reports on Form 8-K

177

  Signatures

204

  Principal Executive Officer and Principal Financial Officer Certifications
     (Exhibit 31)

185

TABLE OF CONTENTS - EXHIBITS

Exh. No.

Registrant(s)

Description of Exhibit

Page

12.1

PHI

Statements Re: Computation of Ratios

179

12.2

Pepco

Statements Re: Computation of Ratios

180

12.3

Conectiv

Statements Re: Computation of Ratios

181

12.4

DPL

Statements Re: Computation of Ratios

182

12.5

ACE

Statements Re: Computation of Ratios

183

15

PHI

Independent Accountants' Awareness Letter

184

31.1

PHI

Rule 13a-14(a)/15d-14(a) Certificate of Chief Executive Officer

185

31.2

PHI

Rule 13a-14(a)/15d-14(a) Certificate of Chief Financial Officer

186

31.3

Pepco

Rule 13a-14(a)/15d-14(a) Certificate of Chief Executive Officer

187

31.4

Pepco

Rule 13a-14(a)/15d-14(a) Certificate of Chief Financial Officer

188

31.5

Conectiv

Rule 13a-14(a)/15d-14(a) Certificate of Chief Executive Officer

189

31.6

Conectiv

Rule 13a-14(a)/15d-14(a) Certificate of Chief Financial Officer

190

31.7

DPL

Rule 13a-14(a)/15d-14(a) Certificate of Chief Executive Officer

191

31.8

DPL

Rule 13a-14(a)/15d-14(a) Certificate of Chief Financial Officer

192

31.9

ACE

Rule 13a-14(a)/15d-14(a) Certificate of Chief Executive Officer

193

31.10

ACE

Rule 13a-14(a)/15d-14(a) Certificate of Chief Financial Officer

194

31.11

ACEF

Rule 13a-14(a)/15d-14(a) Certificate of Chief Executive Officer

195

31.12

ACEF

Rule 13a-14(a)/15d-14(a) Certificate of Chief Financial Officer

196

32.1

PHI

Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

197

32.2

Pepco

Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

198

32.3

Conectiv

Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

199

32.4

DPL

Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

200

32.5

ACE

Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

201

32.6

ACEF

Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

202

PART I    FINANCIAL INFORMATION

Item 1.   FINANCIAL STATEMENTS

     Listed below is a table that sets forth, for each registrant, the page number where the information is contained herein.

                      Registrants                  

Item

Pepco
Holdings

Pepco

Conectiv

DPL

ACE

ACE
Funding

Report of Independent
  Accountants

3

N/A

N/A

N/A

N/A

N/A

Consolidated Statements
  of Earnings

4

34

54

72

82

93

Consolidated Statements
  of Comprehensive
  Earnings

5

35

55

N/A

N/A

N/A

Consolidated Balance
  Sheets

6

36

56

73

83

94

Consolidated Statements
  of Cash Flows

8

38

58

75

85

N/A

Notes to Consolidated
  Financial Statements

9

39

59

76

86

95

THIS PAGE INTENTIONALLY LEFT BLANK.

Report of Independent Accountants

To the Shareholders and Board of Directors
   of Pepco Holdings, Inc.

We have reviewed the accompanying consolidated balance sheet of Pepco Holdings, Inc. and its subsidiaries (the Company) as of September 30, 2003, and the related consolidated statements of earnings and consolidated statements of comprehensive earnings for each of the three-month and nine-month periods ended September 30, 2003 and 2002 and the consolidated statement of cash flows for the nine-month periods ended September 30, 2003 and 2002. These interim financial statements are the responsibility of the Company's management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2002, and the related consolidated statements of earnings, and the consolidated statements of comprehensive earnings, and consolidated statements of cash flows for the year then ended (not presented herein), and in our report dated February 10, 2003, except as to the twelfth and thirteenth paragraphs of Note 14 for which the date is March 4, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of September 30, 2003, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP
Washington, DC
November 13, 2003

PEPCO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(Unaudited)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2003

2002

2003

2002

(Millions of Dollars)

Net income

$157.3 

$115.2 

$175.5 

$184.1 

Other comprehensive earnings (loss), net of taxes

  Unrealized (losses) gains on derivative
    instruments:

    Unrealized holding (losses) gains
      arising during period

(33.9)

2.3 

(43.3)

4.5 

    Less: reclassification adjustment for
           (losses) gains included in net earnings

(4.3)

0.1 

(7.2)

(0.1)

    Net unrealized (losses) gains on
      derivative instruments

(29.6)

2.2 

(36.1)

4.6 

  Realized gain (loss) on Treasury lock

2.9 

(94.9)

8.8 

(105.3)

  Unrealized gain (loss) on interest rate swap
    agreements designated as cash flow hedges:

    Unrealized holding gains (losses) arising
      during period

1.5 

(12.0)

(4.4)

(11.1)

    Less: reclassification adjustment for loss
           included in net earnings

(2.0)

(0.7)

(3.3)

(1.0)

    Net unrealized gain (loss) on interest rate swaps

3.5 

(11.3)

(1.1)

(10.1)

  Unrealized gains on marketable securities:

    Unrealized holding gains arising during period

4.0 

0.4 

5.7 

4.3 

    Less: reclassification adjustment for gains
           included in net earnings

0.6 

0.2 

0.4 

- 

    Net unrealized gains on marketable securities

3.4 

0.2 

5.3 

4.3 

  Other comprehensive losses, before tax

(19.8)

(103.8)

(23.1)

(106.5)

  Income tax benefit

(8.1)

(41.4)

(7.4)

(43.1)

    Other comprehensive losses, net of tax

(11.7)

(62.4)

(15.7)

(63.4)

Comprehensive earnings

$145.6 

$ 52.8 

$159.8 

$120.7 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PEPCO HOLDINGS, INC.

     For additional information, other than the information disclosed in the Notes to Consolidated Financial Statements section herein, refer to Item 8. Financial Statements and Supplementary Data of the Company's 2002 Form 10-K.

(1)  ORGANIZATION

     Pepco Holdings, Inc. (Pepco Holdings or the Company), a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA), was incorporated under the laws of Delaware on February 9, 2001 for the purpose of effecting Potomac Electric Power Company's (Pepco) acquisition of Conectiv. In accordance with the terms of the merger agreement, upon the consummation of the merger on August 1, 2002, Pepco and Conectiv became wholly owned subsidiaries of Pepco Holdings. Additionally, Pepco, through a series of transactions, transferred its ownership interests in its pre-merger subsidiaries Potomac Capital Investment Corporation (PCI) and Pepco Energy Services, Inc. (Pepco Energy Services) to Pepco Holdings and PCI transferred its ownership interest in its pre-merger subsidiary Pepco Communications, Inc. (Pepcom) to Pepco Holdings. These transactions resulted in PCI, Pepco Energy Services, and Pepcom becoming wholly owned subsidia ries of Pepco Holdings. Additionally, PUHCA imposes certain restrictions on the operations of registered holding companies and their subsidiaries; therefore, Pepco Holdings has a subsidiary service company, named PHI Service Company, that provides a variety of support services to Pepco Holdings and its subsidiaries. The costs of the service company are directly assigned or allocated to Pepco Holdings and its subsidiaries based on prescribed allocation factors listed in the service agreement filed with, and approved by, the Securities and Exchange Commission (SEC). Pepco Holdings manages its operations as described below.

Power Delivery

     The largest component of Pepco Holdings' business is power delivery, which is conducted through its subsidiaries Pepco, Delmarva Power & Light Company (DPL), and Atlantic City Electric Company (ACE). Pepco, DPL and ACE are all regulated public utilities in the jurisdictions in which they serve customers. The operations of DPL and ACE are collectively referred to herein as "Conectiv Power Delivery."

Pepco

     Pepco is engaged in the transmission and distribution of electricity in Washington, D.C. and major portions of Prince George's and Montgomery Counties in suburban Maryland. Under settlements approved by the Maryland Public Service Commission and the District of Columbia Public Service Commission in connection with the divestiture of its generation assets in 2000, Pepco is required to provide default electricity supply to customers who do not choose another supplier (referred to as "standard offer service" or "SOS") at specified rates to customers in Maryland until July 2004 and to customers in Washington, D.C. until February 2005. This supply is purchased from an affiliate of Mirant Corporation ("Mirant"). On July 14, 2003, Mirant and most of its subsidiaries filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. For a discussion of Pepco's relationship with Mirant, see Note (4) "Commitments and Continge ncies" herein. For the twelve months ended September 30, 2003, Pepco delivered 5.7 million megawatt hours to SOS customers in the District of Columbia and 10.3 million megawatt hours to SOS customers in Maryland. For this period total deliveries were 11.0 million megawatt hours in the District of Columbia and 15.0 million megawatt hours in Maryland.

Conectiv Power Delivery

     DPL is engaged in the transmission and distribution of electricity in Delaware and portions of Maryland and Virginia and provides gas distribution service in northern Delaware. Under settlements approved by the Maryland Public Service Commission and the Delaware Public Service Commission, DPL is required to provide standard offer electricity service at specified rates to residential customers in Maryland until July 2004 and to non-residential customers in Maryland until May 2004 and to provide default electricity service at specified rates to customers in Delaware until May 2006. It is currently expected that DPL will also provide default electric service at specified rates to customers in Virginia until July 2007. However, the Virginia State Corporation Commission could terminate the obligation for some or all classes of customers sooner if it finds that an effectively competitive market exists. Conectiv Energy (described in the "Competitiv e Energy" section) supplies all of DPL's standard offer and default service load requirements under a supply agreement that ends May 31, 2006. The terms of the supply agreement are structured to coincide with DPL's load requirements under each of its regulatory settlements. Conectiv Energy's resources for supplying DPL's standard offer and default service load include electricity generated by Conectiv Energy's plants and electricity purchased under long-term agreements or in the current market. DPL purchases gas supplies for its customers from marketers and producers in the current market and under short-term and long-term agreements.

     ACE is engaged in the generation, transmission and distribution of electricity in southern New Jersey. Default service obligations, known as Basic Generation Service (BGS) were supplied for the period August 1, 2002 through July 31, 2003 by the following sources. Approximately 80% of the ACE's BGS load was supplied by the winning bidders of the BGS auction. The remaining 20% of ACE's BGS load was supplied utilizing ACE's to be divested fossil fired units (prior to divestiture of the units) and ACE's NUG contracts, to the extent such electric generating plants were not sufficient to satisfy such load. Any excess energy available from these sources was sold to the market to offset the BGS supply costs. Effective August 1, 2003, 100% of the BGS load is supplied by the winning bidders of the 2003 BGS auction with 100% of the capacity and energy available from the NUG contracts sold to the market to offset the NUG contract costs. ACE is providing 500 MW of capacity credits to the winning bidders of the 2003 BGS auction. The energy associated with these capacity credits is sold to the market with the revenues used to offset the operating costs of the fossil units. In January 2003, ACE terminated its competitive bidding process to sell these generation units.

     ACE formed Atlantic City Electric Transition Funding LLC (ACE Funding) during 2001. ACE Transition Funding is a wholly owned subsidiary of ACE. ACE Funding was organized for the sole purpose of purchasing and owning Bondable Transition Property (BTP), issuing transition bonds (Bonds) to fund the purchasing of BTP, pledging its interest in BTP and other collateral to the Trustee to collateralize the Bonds, and to perform activities that are necessary, suitable or convenient to accomplish these purposes.

Competitive Energy

     The competitive energy component of the Company's business is conducted through subsidiaries of Conectiv Energy Holding Company (collectively referred to herein as "Conectiv Energy") and Pepco Energy Services.

Conectiv Energy

     Conectiv Energy supplies power to DPL and ACE and provides wholesale power, capacity, and ancillary services (generally reserves and reliability services) to the Pennsylvania/New Jersey/Maryland (PJM) power pool. Conectiv Energy's generation asset strategy focuses on mid-merit plants with operating flexibility and multi-fuel capability that can quickly change their output level on an economic basis. Mid-merit plants generally are operated during times when demand for electricity rises and prices are higher.

     As of September 30, 2003, Conectiv Energy owned and operated electric generating plants with 3,302 MW of capacity. In January 2002, Conectiv Energy began construction of a 1,100 MW combined cycle plant with six combustion turbines (CTs) at a site in Bethlehem, Pennsylvania. The plant has become operational in stages that added 306 MW in 2002 (resulting from the installation of three CTs), 279 MW in the first quarter of 2003 (resulting from the installation of an additional two CTs and an upgrade of the CTs installed during 2002), 296 MW in the second quarter (resulting from the installation of one additional CT and one waste heat recovery boiler and steam generating unit), and is expected to add an additional 179 MW of capacity in the fourth quarter (resulting from the installation of a second waste heat recovery boiler and steam generating unit) and 30 MW in 2004 resulting from the installation of a spray water system to the six Bethlehem CTs.

Pepco Energy Services

     Pepco Energy Services provides retail electricity and natural gas to residential, commercial, industrial and governmental customers in the mid-Atlantic region. Pepco Energy Services also provides integrated energy management solutions to commercial, industrial and governmental customers, including energy-efficiency contracting, development and construction of "green power" facilities, equipment operation and maintenance, fuel management, and home service agreements. In addition, Pepco Energy Services owns electricity generation plants with approximately 800 MW of peaking capacity, the output of which is sold in the wholesale market. Pepco Energy Services also purchases and sells electricity and natural gas in the wholesale markets to support its commitments to its retail customers. Additionally, depending on market conditions, Pepco Energy Services may elect to use electricity generated from its generating plants to satisfy some of these co mmitments. These plants are dispatched by PJM.

Other Non-Regulated

     This component of Pepco Holdings' business is conducted through its subsidiaries PCI and Pepcom.

PCI

     PCI manages a portfolio of financial investments. During the second quarter of 2003, Pepco Holdings announced the discontinuation of further new investment activity by PCI. Going forward PCI will continue to pursue opportunities to divest its remaining aircraft assets and will continue to manage its existing portfolio of financial investments which principally include energy leveraged leases. These transactions involve PCI's purchase and leaseback of utility assets located outside of the United States. On September 30, 2003, PCI sold its final real estate property, an office building known as Edison Place (that serves as headquarters for Pepco Holdings and Pepco), for $151 million in cash and recognized a pre-tax gain of $68.8 million ($44.7 million after-tax) during the third quarter of 2003.

     As part of the previously announced reorganization of PCI's business activities, on July 31, 2003, the Board of Directors of PCI approved a dividend of Pepco Enterprises, Inc. (PEI), then a wholly owned subsidiary of PCI with assets of $13.2 million, to Pepco Holdings, effective August 1, 2003. Pepco Holdings then, as part of the reorganization, contributed PEI to Pepco Energy Services. PEI includes the principal operating businesses of W.A. Chester and Severn Cable. W.A. Chester provides high voltage construction and maintenance services to utilities and to other customers throughout the United States. Severn Cable provides low voltage electric and telecommunication construction and maintenance services in the Washington, D.C. area.

Pepcom

     Pepcom owns a 50% interest in Starpower Communications, LLC (Starpower), a joint venture with RCN Corporation, which provides cable and telecommunication services to households in the Washington, D.C. area.

(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND IMPACT OF OTHER
       ACCOUNTING STANDARDS

Significant Accounting Policies

Principles of Consolidation

     The accompanying consolidated financial statements include the accounts of Pepco Holdings and its wholly owned subsidiaries. All intercompany balances and transactions between subsidiaries have been eliminated. Investments in entities in which Pepco Holdings has a 20% to 50% interest are accounted for using the equity method of accounting. Under the equity method, investments are initially carried at cost and subsequently adjusted for Pepco Holdings' proportionate share of the investees' undistributed earnings or losses and dividends. Ownership interests in other entities of less than 20% are accounted for using the cost method of accounting.

Consolidated Financial Statement Presentation

     The Company's unaudited consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). Pursuant to the rules and regulations of the U.S. Securities and Exchange Commission, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted. Therefore, these financial statements should be read along with our Annual Report on Form 10K for the year ended December 31, 2002. In management's opinion, the consolidated financial statements contain all adjustments (which all are of a normal recurring nature) necessary to present fairly Pepco Holdings' financial position as of September 30, 2003 and 2002, in accordance with GAAP. Interim results for the three months and nine months ended September 30, 2003 may not be indicative of results that will be realized for the full year end ing December 31, 2003. Certain prior period amounts have been reclassified in order to conform to current period presentation.

     The accompanying consolidated statements of earnings and the consolidated statements of comprehensive earnings for the three and nine months ended September 30, 2003 and the consolidated statements of cash flows for the nine months ended September 30, 2003 include Pepco Holdings and its subsidiaries results for the full periods. However, these statements for the corresponding periods in 2002, as previously reported by Pepco, include the results of Pepco and its pre-merger subsidiaries for the entire period consolidated with the results of Conectiv and its subsidiaries starting on August 1, 2002, the date the merger was completed. Accordingly, the consolidated balances included in the statements referred to above for the three and nine months ended September 30, 2003 and 2002 are not comparable. However, the amounts presented in the accompanying consolidated balance sheets as of September 30, 2003 and December 31, 200 2, respectively, are comparable as both periods presented reflect the impact of the merger transaction with Conectiv.

     Pepco Holdings' independent accountants have performed a review of, and issued a report on, these consolidated interim financial statements in accordance with standards established by the American Institute of Certified Public Accountants. Pursuant to Rule 436(c) under the U.S. Securities Act of 1933, this report should not be considered a part of any registration statement prepared or certified within the meanings of Section 7 and 11 of the Securities Act.

Classification Items

     Pepco Holdings recorded amounts for the allowance for funds used during construction of $1.9 million and $1.2 million for the three months ended September 30, 2003 and 2002, respectively, and $5.9 million and $4.6 million for the nine months ended September 30, 2003 and 2002, respectively. These amounts are recorded as a reduction of "interest expense" within the "other income (expense)" caption in the accompanying consolidated statements of earnings.

     Pepco Holdings recorded amounts for unbilled revenue of $217.2 million and $161.0 million as of September 30, 2003 and December 31, 2002. These amounts are included in the "accounts receivable" line item in the accompanying consolidated balance sheets.

Use of Estimates

     The preparation of financial statements in conformity with GAAP, such as Statement of Position 94-6 "Disclosure of Certain Significant Risks and Uncertainties," requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. Examples of estimates used by Pepco Holdings include the calculation of the allowance for uncollectible accounts, environmental remediation costs and anticipated collections, unbilled revenue, pension assumptions, and fair values used in the purchase method of accounting and the resulting goodwill balance. Although Pepco Holdings believes that its estimates and assumptions are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates.

Impact of Other Accounting Standards

Severance Costs

     During 2002, Pepco Holdings' management approved initiatives by Pepco and Conectiv to streamline their operating structure by reducing the number of employees at each company. These initiatives met the criteria for the accounting treatment provided under EITF No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." As of December 31, 2002, Pepco Holdings accrued $23.2 million of severance costs in connection with the plan. As of September 30, 2003, the severance liability had a balance of $9.0 million. Based on the number of employees that have or are expected to accept the severance packages, substantially all of the severance liability at September 30, 2003 will be paid through mid 2005. Employees have the option of taking severance payments in a lump sum or over a period of time.

Asset Retirement Obligations

     In September 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143 entitled "Accounting for Asset Retirement Obligations," which was adopted by Pepco Holdings on January 1, 2003. This Statement establishes the accounting and reporting standards for measuring and recording asset retirement obligations. Based on the implementation of SFAS No. 143, at September 30, 2003, $256.0 million in asset removal costs that are not legal obligations pursuant to the statement ($179.6 million for DPL and $76.4 million for Pepco) and $245.3 million at December 31, 2002 ($173.2 million for DPL and $72.1 million for Pepco) have been accrued and are embedded in accumulated depreciation in the accompanying consolidated balance sheets.

Accounting for Guarantees and Indemnifications

     Pepco Holdings and its subsidiaries have applied the provisions of FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," to their agreements that contain guarantee and indemnification clauses. These provisions expand those required by FASB Statement No. 5, "Accounting for Contingencies," by requiring a guarantor to recognize a liability on its balance sheet for the fair value of obligation it assumes under certain guarantees issued or modified after December 31, 2002 and to disclose certain types of guarantees, even if the likelihood of requiring the guarantor's performance under the guarantee is remote.

     As of September 30, 2003, Pepco Holdings and its subsidiaries did not have material obligations under guarantees or indemnifications issued or modified after December 31, 2002, which are required to be recognized as a liability on the consolidated balance sheets. Refer to Note 4. Commitments and Contingencies, herein, for a summary of Pepco Holdings' guarantees and other commitments.

New Accounting Standards

     On October 9, 2003, the Financial Accounting Standards Board (FASB) issued FASB Staff Position FIN 46-6 entitled "Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46)," deferring the effective date for applying the provisions of FIN 46 for interests held by public entities in variable interest entities or potential variable interest entities created before February 1, 2003. The Staff Position defers the effective date of FIN 46 from the fiscal year or interim period beginning after June 15, 2003 to the end of the first interim or annual period ending after December 15, 2003 (year end 2003 financial statements for Pepco Holdings), if both the variable interest entity was created before February 1, 2003 and the public entity has not issued financial statements reporting that variable interest entity in accordance with FIN 46, other than in the disclosures required by paragraph 26 of FIN 46. Pepco Ho ldings' assessment of FIN 46 to date has identified some entities that may require deconsolidation. However, Pepco Holdings does not anticipate that the implementation of FIN 46 will impact its overall financial condition or results of operations.

     During the third quarter of 2003 Pepco Holdings implemented SFAS No. 150 entitled "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. The Statement resulted in Pepco Holdings' reclassification of its "Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Which Holds Solely Parent Junior Subordinated Debentures" ("TOPrS") and "Mandatorily Redeemable Serial Preferred Stock" on its consolidated balance sheets to a long term liability classification. In accordance with the provisions of SFAS No. 150, prior period amounts were not reclassified. There was no impact on Pepco Holdings' results of operations from the implementation of this Statement.

     Pepco, DPL, and ACE have wholly owned financing subsidiary trusts shown in the table below. The financing subsidiary trusts have common and preferred trust securities outstanding and hold Junior Subordinated Debentures (the Debentures) of Pepco, DPL, and ACE. Pepco, DPL, and ACE own all of the common securities of the trusts, which constitute approximately 3% of the liquidation amount of all of the trust securities issued by the trusts. The trusts use interest payments received on the Debentures, which are the trusts' only assets, to make cash distributions on the trust securities. The obligations of Pepco, DPL, and ACE pursuant to the Debentures and guarantees of distributions with respect to the trusts' securities, to the extent the trusts have funds available therefore, constitute full and unconditional guarantees of the obligations of the trusts under the trust securities the trusts have issued.

     For Pepco Holdings' consolidated financial reporting purposes, the Debentures are eliminated in consolidation against the trust's investment in the Debentures. The preferred trust securities are subject to mandatory redemption upon payment of the Debentures at maturity or upon redemption. The Debentures mature in 2026 to 2038. The Debentures are subject to redemption, in whole or in part, at the option of Pepco, DPL, and/or ACE, at 100% of their principal amount plus accrued interest.

     If redemption had occurred at September 30, 2003, the maximum principal amount required to redeem the securities would have been the same as the amount recorded on the accompanying consolidated balance sheet.

     Pepco had outstanding $45 million and $47.5 million at September 30, 2003 and December 31, 2002, respectively, related to shares of $3.40 (6.80%) Series of 1992 that are subject to mandatory redemption, at par, through the operation of a sinking fund that began redeeming 50,000 shares annually, on September 1, 2002, with the remaining shares to be redeemed on September 1, 2007. There were 900,000 shares and 950,000 shares, outstanding at September 30, 2003 and December 31, 2002, respectively. The sinking fund requirements through 2006 with respect to the Redeemable Serial Preferred Stock are $2.5 million in 2004, 2005, and 2006. In the event of default with respect to dividends, or sinking fund or other redemption requirements relating to the mandatorily serial preferred stock, no dividends may be paid, nor any other distribution made, on common stock. Payments of dividends on all series of serial preferred or preference stock, including se ries that are mandatorily redeemable, must be made concurrently. If redemption had occurred at September 30, 2003, the maximum principal amount required to redeem the securities would have been the same as the amount recorded on the accompanying consolidated balance sheet.

(3)  SEGMENT INFORMATION

     Pepco Holdings' management has identified the following reportable segments: Pepco, Conectiv Power Delivery, Conectiv Energy, Pepco Energy Services, and Other Non-Regulated. Intercompany (intersegment) revenues and expenses are not eliminated at the segment level for purposes of presenting segment financial results. Elimination of these intercompany amounts is accomplished through the "Corporate and Other" column. Segment financial information for the three and nine months ended September 30, 2003 and 2002 is as follows.

(a)

These amounts reflect the operating results of Pepco Holdings and its subsidiaries for the full three month period ended September 30,2003. These amounts are not comparable with the corresponding 2002 period, which include the results of Pepco and its pre-merger subsidiaries for the entire period consolidated with the results of Conectiv and its subsidiaries starting on August 1, 2002, the date the merger was completed.

(b)

"Corporate & Other" for 2003 primarily includes the elimination of all intercompany operating revenues and expenses. In addition, this includes unallocated Pepco Holdings (parent company) capital costs, such as acquisition financing costs as well as depreciation and amortization related to purchase accounting adjustments for the fair value of non-regulated Conectiv assets and liabilities as of August 1, 2002.

(c)

These amounts reflect the results of Pepco and its pre-merger subsidiaries for the entire period consolidated with the results of Conectiv and its subsidiaries starting on August 1, 2002, the date the merger was completed. These amounts are not comparable with the corresponding 2003 period, which include Pepco Holdings and its subsidiaries results for the entire period.

(d)

"Corporate & Other" for 2002 primarily includes the elimination of all intercompany operating revenues and expenses. In addition, this includes unallocated Pepco Holdings (parent company) capital costs, such as acquisition financing costs as well as depreciation and amortization related to purchase accounting adjustments for the fair value of non-regulated Conectiv assets and liabilities as of August 1, 2002.

(a)

These amounts reflect the operating results of Pepco Holdings and its subsidiaries for the full nine month period ended September 30, 2003. These amounts are not comparable with the corresponding 2002 period, which include only the results of Pepco and its pre-merger subsidiaries for the entire period consolidated with the results of Conectiv and its subsidiaries starting on August 1, 2002, the date the merger was completed.

(b)

"Corporate & Other" for 2003 primarily includes the elimination of all intercompany operating revenues and expenses. In addition, operating expense includes the reversal of a purchase accounting adjustment related to the cancellation of the Conectiv Energy CTs of $57.9 million ($34.6 million after-tax), as well as unallocated Pepco Holdings (parent company) capital costs, such as acquisition financing costs as well as depreciation and amortization related to purchase accounting adjustments for the fair value of non-regulated Conectiv assets and liabilities as of August 1, 2002.

(c)

These amounts reflect the results of Pepco and its pre-merger subsidiaries for the entire period consolidated with the results of Conectiv and its subsidiaries starting on August 1, 2002, the date the merger was completed. These amounts are not comparable with the corresponding 2003 period, which includes Pepco Holdings and its subsidiaries results for the entire period.

(d)

"Corporate & Other" for 2002 primarily includes the elimination of all intercompany operating revenues and expenses. In addition, unallocated Pepco Holdings (parent company) capital costs, such as acquisition financing costs as well as depreciation and amortization related to purchase accounting adjustments for the fair value of non-regulated Conectiv assets and liabilities as of August 1, 2002, are included here.

(4)   COMMITMENTS AND CONTINGENCIES

Relationship with Mirant Corporation

     In 2000, Pepco sold substantially all of its electricity generation assets to Mirant Corporation, formerly Southern Energy, Inc. As part of the sale, Pepco entered into several ongoing contractual arrangements with Mirant and certain of its subsidiaries (collectively, "Mirant"). On July 14, 2003, Mirant Corporation and most of its subsidiaries filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Texas (the "Bankruptcy Court"). Under bankruptcy law, a debtor generally may, with authorization from a bankruptcy court, assume or reject executory contracts. A rejection of an executory contract entitles the counterparty to file a claim as an unsecured creditor against the bankruptcy estate for damages incurred due to the rejection of the contract. In a bankruptcy proceeding, a debtor can normally restructure some or all of its pre-petition liabilities .

     Depending on the outcome of the matters discussed below, the Mirant bankruptcy could have a material adverse effect on the results of operations of Pepco Holdings and Pepco. However, management currently believes that Pepco Holdings and Pepco currently have sufficient cash, cash flow and borrowing capacity under their credit facilities and in the capital markets to be able to satisfy the additional cash requirements that may arise due to the Mirant bankruptcy. Accordingly management does not anticipate that the Mirant bankruptcy will impair the ability of Pepco Holdings or Pepco to fulfill their contractual obligations or to fund projected capital expenditures. On this basis, management currently does not believe that the Mirant bankruptcy will have a material adverse effect on the financial condition of either company.

Transition Power Agreements

     As part of the asset purchase and sale agreement for the Pepco generation assets (the "Asset Purchase and Sale Agreement"), Pepco and Mirant entered into Transition Power Agreements for Maryland and the District of Columbia, respectively (collectively, the "TPAs"). Under these agreements, Mirant was obligated to supply Pepco with all of the capacity and energy needed to fulfill its standard offer service obligations in Maryland through June 2004 and its standard offer service obligations in the District of Columbia into January 2005, in each case at rates that were lower than the rates that Pepco charges to its customers. The rates under the TPAs currently are less than the prevailing market rates.

     On October 24, 2003, Pepco entered into a Settlement Agreement and Release (the "Settlement Agreement") with Mirant Corporation and its affiliate Mirant Americas Energy Marketing, LP (the "Mirant Parties"), pursuant to which the Mirant Parties have agreed that they will assume both of the TPAs in exchange for Pepco's agreement to amend the TPAs, effective October 1, 2003, to increase the purchase price of energy under the TPAs. Under the Settlement Agreement, the parties also agreed that Pepco will have an allowed, pre-petition general unsecured claim against each of the Mirant Parties in the amount of $105 million (the "Pepco TPA Claim"). Additionally, Pepco will have the right to assert the Pepco TPA Claim against other Mirant debtors. The effectiveness of the Settlement Agreement is contingent upon the approval of the Settlement Agreement, including the Pepco TPA Claim, by an order of the Bankruptcy Court. At a hearing on November 1 2, 2003, the Bankruptcy Court indicated it would approve the Settlement Agreement, subject to the parties agreeing on the forms of the applicable orders.

     In accordance with the Settlement Agreement, the purchase price of energy would increase to $41.90 per megawatt hour during summer months (May 1 through September 30) and $31.70 per megawatt hour during winter months (October 1 through April 30) under the District of Columbia TPA and would increase to $46.40 per megawatt hour during summer months and $28.60 per megawatt hour during winter months under the Maryland TPA. Under the amended TPAs, the purchase prices paid by Pepco for capacity in the District of Columbia and Maryland would remain $3.50 per megawatt hour and the charge paid by Pepco for certain ancillary services would remain $.50 per megawatt hour. The revisions would result in an increase in the average purchase price to Pepco for energy from approximately 3.4 cents per kilowatt hour to an average purchase price of approximately 4.0 cents per kilowatt hour. The revenues produced by the currently approved tariff rates that Pepco charges its customers for providing standard offer service average approximately 4.1 cents per kilowatt hour.

     The Settlement Agreement, if approved by the Bankruptcy Court, would eliminate the price risk that Pepco would have incurred had the TPAs been rejected. Pepco estimates that, if the Settlement Agreement is approved by the court, it will pay Mirant an additional $105 million for the purchase of energy over the remaining terms of the TPAs. These payments will be offset by a reduction of payments by Pepco to customers for the period 2003 through 2006 of approximately $45 million pursuant to the generation procurement credit established pursuant to regulatory settlements entered into in the District of Columbia and Maryland under which Pepco and its customers share any margin between the price paid by Pepco to procure standard offer service and the price paid by customers for standard offer service. As a result, Pepco currently anticipates that it will incur a net additional cash outlay of approximately $60 million due to the amendments of the r espective TPAs. The foregoing estimates are based on current service territory load served by competitive suppliers and by standard offer service and does not include financing costs, all of which could be subject to fluctuation.

     If the Settlement Agreement is not approved and the TPAs are successfully rejected by Mirant, Pepco would be required to replace the electricity currently supplied under the TPAs, likely through one or more supply contracts supplemented by market purchases. Pepco is confident that it would have alternative sources of supply sufficient to fulfill its standard offer service obligations to customers in Washington, D.C. which expire in February 2005 and Maryland at the end of June 2004. Pepco estimates that as of November 12, 2003 it would cost approximately $30 million for the remainder of 2003, $100 million in 2004 and $9 million in 2005 to replace, at a projected purchase price of approximately 4.7 cents per kilowatt hour, the electricity required to supply Pepco's standard offer service obligations in Maryland and the District of Columbia for the remainder of the respective terms of the TPAs. These figures include the impact of the generat ion procurement credit.

     In summary, if the Settlement Agreement is approved, or if the Settlement Agreement is not approved and the TPAs are successfully rejected, Pepco's earnings in the future will be lower. There was no impact on Pepco's results of operations or financial condition during the quarter ended September 30, 2003, as a result of the amended TPAs.

     There is no assurance that the Bankruptcy Court will approve the Settlement Agreement. If the Settlement Agreement is approved, the amount, if any, that Pepco will be able to recover from the Mirant bankruptcy estate in respect of the Pepco TPA Claim will depend on the amount of assets available for distribution to creditors. At the current stage of the bankruptcy proceeding, there is insufficient information to determine the amount, if any, that Pepco might be able to recover from the Mirant bankruptcy estate. Accordingly, no receivable has been recorded in Pepco's accounting records. Any recovery would be subject to the generation procurement credit.

Power Purchase Agreements

     Under agreements with FirstEnergy Corp., formerly Ohio Edison ("FirstEnergy"), and Allegheny Energy, Inc., both entered into in 1987, Pepco is obligated to purchase from FirstEnergy 450 megawatts of capacity and energy annually through December 2005 (the "FirstEnergy PPA"). Under an agreement with Panda-Brandywine, L.P. ("Panda"), entered into in 1991, Pepco is obligated to purchase from Panda 230 megawatts of capacity and energy annually through 2021 (the "Panda PPA"). In each case, the purchase price is substantially in excess of current market prices. As a part of the Asset Purchase and Sale Agreement, Pepco entered into a "back-to-back" arrangement with Mirant. Under this arrangement, Mirant is obligated, among other things, to purchase from Pepco the capacity and energy that Pepco is obligated to purchase under the FirstEnergy PPA and the Panda PPA at a price equal to the price Pepco is obligated to pay under the PPAs (the "PPA-Related Obl igations").

     Pepco Pre-Petition Claims

     When Mirant filed its bankruptcy petition on July 14, 2003, Mirant had unpaid obligations to Pepco of approximately $29 million, consisting primarily of payments due Pepco in respect of the PPA-Related Obligations (the "Mirant Pre-Petition Obligations"). The Mirant Pre-Petition Obligations constitute part of the indebtedness for which Mirant is seeking relief in its bankruptcy proceeding. Pepco will file a claim against the Mirant bankruptcy estate to recover the full amount of this indebtedness; however, the amount of Pepco's recovery, if any, is uncertain. In view of this uncertainty, Pepco, in the third quarter of 2003, expensed $14.5 million ($8.7 million after-tax) to establish a reserve against the $29 million receivable from Mirant. The amount expensed represents Pepco's current estimate of the possible outcome in bankruptcy, although the amount ultimately recoverable could be higher or lower.

     Mirant's Attempt to Reject the PPA-Related Obligations

     On August 28, 2003, Mirant filed with the Bankruptcy Court a motion seeking authorization to reject its PPA-Related Obligations. Mirant's motion also sought injunctions to prohibit Pepco from initiating, or encouraging any person or entity to initiate, any proceedings before the Federal Energy Regulatory Commission ("FERC") that seek to require Mirant to perform the PPA-Related Obligations and to prohibit FERC from taking any action to require Mirant to perform the PPA-Related Obligations.

     Upon motions filed by Pepco and FERC, on October 9, 2003, the U.S. District Court for the Northern District of Texas (the "District Court") withdrew jurisdiction over both the rejection and preliminary injunction proceedings from the Bankruptcy Court. On October 30, Pepco submitted to the District Court its opposition to Mirant's motion to reject the PPA-Related Obligations. FERC filed a brief in support of Pepco's position on the same date. In addition, the National Association of Regulatory Utility Commissioners filed an amicus brief in support of Pepco's position on October 30, 2003. On November 6, Mirant submitted its reply to Pepco's opposition and The Official Committee of Unsecured Creditors of Mirant Corporation filed a brief in support of Mirant's motion to reject the PPA-Related Obligations. Pepco is exercising all available legal remedies and vigorously opposing Mirant's attempts to reject the PPA-Related Obligations in ord er to protect the interests of its customers and shareholders. While Pepco believes that it has substantial legal bases to oppose the attempt to reject the agreements, the outcome of the proceeding cannot be predicted with any degree of certainty.

     In accordance with the Bankruptcy Court's September 25 order, Mirant is continuing to perform the PPA-Related Obligations pending the resolution of the ongoing proceedings. However, if Mirant successfully rejects, and is otherwise permitted to stop performing the PPA-Related Obligations, Pepco would be required to repay to Mirant, for the period beginning on the effective date of the rejection (the earliest possible effective date is September 18, 2003) and ending on the date Mirant is entitled to cease its purchases of energy and capacity from Pepco, all amounts paid by Mirant to Pepco in respect of the PPA-Related Obligations, less an amount equal to the price at which Mirant resold the purchased energy and capacity. Pepco estimates that the amount it would be required to repay to Mirant if rejection were permitted as indicated above, as of November 12, 2003, is approximately $21 million. This repayment would entitle Pepco to file a cl aim against the bankruptcy estate in an amount equal to the amount repaid. Mirant has also asked the Bankruptcy Court to require Pepco to disgorge such amounts accrued from July 14, 2003, the date on which Mirant filed its bankruptcy petition to September 18, 2003, on the theory that Mirant did not receive value for those payments. Pepco estimates that the amount it would be required to repay to Mirant on the disgorgement theory is approximately $22.8 million. Pepco believes a claim based on this theory should be entitled to administrative expense status for which complete recovery could be expected. If Pepco were required to repay any such amounts, the payment would be expensed at the time the payment is made.

     The following are estimates prepared by Pepco of its additional exposure if Mirant's motion to reject its PPA-Related Obligations is successful. These estimates are based in part on current market prices and forward price estimates for energy and capacity, and do not include financing costs, all of which could be subject to significant fluctuation. The estimates assume no recovery from the Mirant bankruptcy estate and no regulatory recovery, either of which would mitigate the effect of the estimated loss. Pepco does not consider it realistic to assume that there will be no such recoveries. Based on these assumptions, Pepco estimates that its pre-tax exposure as of November 1, 2003, representing the loss of the future benefit of the PPA-Related Obligations to Pepco, is as follows:

·

If Pepco were required to purchase capacity and energy from FirstEnergy commencing as of November 1, 2003, at the rates provided in the PPA (with an average price per kilowatt hour of approximately 5.7 cents) and resold the capacity and energy at market rates projected, given the characteristics of the FirstEnergy PPA, to be approximately 3.9 cents per kilowatt hour, Pepco estimates that it would cost approximately $12 million for the remainder of 2003, $75 million in 2004 and $65 million in 2005, the last year of the FirstEnergy PPA.

·

If Pepco were required to purchase capacity and energy from Panda commencing as of November 1, 2003, at the rates provided in the PPA (with an average price per kilowatt hour of approximately 14.3 cents), and resold the capacity and energy at market rates projected, given the characteristics of the Panda PPA, to be approximately 7.1 cents per kilowatt hour, Pepco estimates that it would cost approximately $7 million for the remainder of 2003, $40 million in 2004, and $35 million in 2005 and approximately $35 million to $40 million annually thereafter through the 2021 contract termination date. For a discussion of a separate dispute with Panda regarding this agreement, see Part II, Item I, Legal Proceedings. Any potential liability in the Panda litigation would be encompassed within the estimated loss discussed above.

     The ability of Pepco to recover from the Mirant bankruptcy estate in respect of the Mirant Pre-Petition Obligations and damages if the PPA-Related Obligations are successfully rejected will depend on whether Pepco's claims are allowed, the amount of assets available for distribution to creditors and Pepco's priority relative to other creditors. At the current stage of the bankruptcy proceeding, there is insufficient information to determine the amount, if any, that Pepco might be able to recover from the Mirant bankruptcy estate, whether the recovery would be in cash or another form of payment or the timing of any recovery.

     If Mirant successfully rejects the PPA-Related Obligations and Pepco's full claim is not recovered from the Mirant bankruptcy estate, Pepco may seek authority from the Maryland and District of Columbia Public Service Commissions to recover its additional costs. Pepco is committed to working with its regulatory authorities to achieve a result that is appropriate for its shareholders and customers. Under the provisions of the settlement agreements approved by the Maryland and District of Columbia Public Service Commissions in the deregulation proceedings in which Pepco agreed to divest its generation assets under certain conditions, the PPAs were to become assets of Pepco's distribution business if they could not be sold. Pepco believes that, if Mirant is successful in its motion to reject the PPA-Related Obligations, these provisions would allow the stranded costs of the PPAs that are not recovered from the Mirant bankruptcy estate to be recove red ultimately through Pepco's distribution rates. If Pepco's interpretation of the settlement agreements is confirmed, Pepco expects to be able to establish the amount of its anticipated recovery as a regulatory asset. However, there is no assurance that Pepco's interpretation of the settlement agreements would be confirmed by the respective public service commissions.

     If the PPA-Related Obligations are successfully rejected, and there is no regulatory recovery, Pepco will incur a loss. However, the accounting treatment of such a loss depends on a number of legal and regulatory factors, and is not determinable at this time.

The SMECO Agreement

     As a term of the Asset Purchase and Sale Agreement, Pepco assigned to Mirant a facility and capacity agreement with Southern Maryland Electric Cooperative, Inc. ("SMECO") under which Pepco was obligated to purchase the capacity of an 84-megawatt combustion turbine installed and owned by SMECO at a former Pepco generating station (the "SMECO Agreement"). The agreement commenced in 1990 and has a monthly payment of approximately $.5 million. Pepco is responsible to SMECO for the performance of the SMECO Agreement if Mirant fails to perform its obligations thereunder. At this time, Mirant continues to make post-petition payments due to SMECO.

Other Commitments and Contingencies

Rate Changes

     On February 3, 2003, ACE filed a petition with the New Jersey Board of Public Utilities (NJBPU) to increase its electric distribution rates in New Jersey. The petition seeks a rate increase of approximately $68.4 million in electric delivery revenues, which equates to an increase in average total electricity rates of 6.9 percent overall. This is the first increase requested for electric distribution rates since 1991 and requests continuation of the currently authorized 12.5% Return on Equity (ROE). Of the $68.4 million increase requested, $63.4 is related to an increase in ACE's distribution rates. The remaining $5.0 million of ACE's request is related to the recovery of regulatory assets through ACE's Regulatory Asset Recovery Charge (RARC). The recovery of regulatory assets is requested over a four-year period, including carrying costs. The RARC request was subsequently modified to $4.2 million since some of the costs included in the orig inal filing were no longer being incurred by ACE. The revised total revenue request was $67.6 million. On October 28, 2003, ACE filed a required update to reflect actuals for the entire test year. By updating forecasted data and making corrections that were identified in discovery or the updating process, the revised increase is $36.8 million, plus a RARC of $4.5 million, for a total increase request of $41.3 million. By Order dated July 31, 2003 in another matter, the NJBPU moved consideration of approximately $25.4 million of deferred restructuring costs into this proceeding. These deferred restructuring costs are subject to deferred accounting through the Basic Generation Service, Net Non-Utility Generation Charge, Market Transition Charge and Societal Benefits Charge of the Company's tariffs. In the October 28, 2003, update to the base case ACE filed testimony supporting the recovery of $31 million in deferred costs transferred to the Base Case from the deferral case. Of these costs, $3.7 million are associated with the Company's Basic Generation Service (BGS) activities and $27.3 million of the costs are restructuring transition-related costs. The filing also supported recovery of $5.1 million in transaction costs related to the fossil generation divestiture efforts. If recovery of the $36.1 million is approved, it is expected that recovery, with interest, will continue to be subject to deferred accounting through the above listed components of ACE's tariffs over a period of time as determined by the NJBPU. A schedule has been set which would make possible a final order in mid 2004. ACE cannot predict at this time the outcome of this filing.

     On March 31, 2003, DPL filed with the Delaware Public Service Commission for a gas base rate increase of $16.8 million, or an increase of 12.7% in total operating revenue. The filing included a request for a ROE of 12.5%. DPL is currently authorized a ROE of 11.5% in Delaware. This is the first increase requested for its gas distribution since 1994. DPL has exercised its statutory right to place an interim base rate increase of $2.5 million or 1.9% into effect on May 30, 2003, subject to refund. On October 7, 2003 a settlement agreement of all parties was filed with the DPSC. The settlement provides for an annual increase in Gas Base Revenues of $7.75 million, with a 10.5% ROE. This equates to a 5.8% increase in total revenues. In addition, the Settlement provides for establishment of an Environmental Surcharge to recover costs associated with remediation of a Coal Gas Site and no refund of the previously implemented interim rate increase. On October 21, 2003 the Commission remanded the case back to Hearing Examiner to conduct an evening public hearing because a group of customers voiced a concern that they had not had an opportunity to be heard. On Monday, November 3, 2003, this hearing was held. The Hearing Examiner will now issue his report on the settlement that was previously submitted to him that reflects a final $7.75 million gas base increase. The Hearing Examiner's report will reflect whatever weight he assigns to the public hearing held on November 3. It is expected that the Commission will deliberate on the Hearing Examiner's recommendation on Tuesday, November 25, 2003. In addition, an increase to the Company's Gas Cost Adjustment was effective on November 1, 2003. This change, which is made on an annual basis, results from a filing made by the Company on August 29, 2003, and will be the subject of a regulatory review.

Stranded Cost Determination and Securitization

     On January 31, 2003, ACE filed a petition with the NJBPU seeking an administrative determination of stranded costs associated with the B. L. England ("BLE") generating facility. The net after tax stranded costs included in the petition were approximately $151 million. An administrative determination of the stranded costs is needed due to the cancelled sale of the plant. On July 25, 2003 the NJBPU rendered an oral decision approving the administrative determination of stranded costs at a level of $149.5 million. As a result of this order, ACE reversed $10.0 million ($5.9 million after-tax) of previously accrued liability for possible disallowance of stranded costs. This credit to expense is classified as an extraordinary item in the Consolidated Statements of Earnings because the original accrual was part of an extraordinary charge resulting from the discontinuation of SFAS No. 71, "Accounting for the Effects of Certain Types of Regula tion" in conjunction with the deregulation of ACE's energy business in September 1999.

     On February 5, 2003, the NJBPU issued an order on its own initiative seeking input from ACE and the Ratepayer Advocate within 10 days as to whether and by how much to cut the 13% pre-tax return that ACE was then authorized to earn on BLE. ACE responded on February 18 with arguments that: 1) reduced costs to ratepayers could be achieved legally through timely approvals by the NJBPU of the stranded cost filing made by ACE on January 31, 2003, and a securitization filing made the week of February 10; and 2) it would be unlawful, perhaps unconstitutional, and a breach of settlement and prior orders for the NJBPU to deny a fair recovery on prudently incurred investment and to do so without evidentiary hearings or other due process. On April 21, 2003, the NJBPU issued an order making the return previously allowed on BLE interim, as of the date of the order, and directing that the issue of the appropriate return for BLE be included in the stranded c ost proceeding. On July 25, 2003, the NJBPU voted to approve a pre-tax return reflecting a 9.75% Return on Equity for the period April 21, 2003 through August 1, 2003. The rate from August 1, 2003 through such time as ACE securitizes the stranded costs will be 5.25%, which the NJBPU represents as being approximately equivalent to the securitization rate. On September 25, 2003 the NJBPU issued its written order memorializing its July 25, 2003 decision.

     On February 14, 2003, ACE filed a Bondable Stranded Costs Rate Order Petition with the NJBPU. The petition requested authority to issue $160 million of Transition Bonds to finance the recovery of stranded costs associated with BLE and costs of issuances. This proceeding is related to the proceeding seeking an administrative determination of the stranded costs associated with BLE that was the subject of the July 25, 2003 NJBPU vote. On September 25, 2003 the NJBPU issued its bondable stranded cost rate order authorizing the issuance of up to $152 million of transition bonds.

Restructuring Deferral

     On August 1, 2002, in accordance with the provisions of New Jersey's Electric Discount and Energy Competition Act (EDECA) and the NJBPU Final Decision and Order concerning the restructuring of ACE's electric utility business, ACE petitioned the NJBPU for the recovery of about $176.4 million in actual and projected deferred costs incurred by ACE over the four-year period August 1999 through July 31, 2003. The requested 8.4% increase was to recover those deferred costs over a new four-year period beginning August 1, 2003 and to reset rates so that there would be no under-recovery of costs embedded in ACE's rates on or after that date. ACE's recovery of the deferred costs is subject to review and approval by the NJBPU in accordance with EDECA. An Initial Decision by the Administrative Law Judge was rendered on June 3, 2003. The Initial Decision was consistent with the recommendations of the auditors hired by the NJBPU to audit ACE's defer ral balances.

     On July 31, 2003, the NJBPU issued its Summary Order permitting ACE to begin collecting a portion of the deferred costs that were incurred as a result of EDECA and to reset rates to recover on-going costs incurred as a result of EDECA.

     The Summary Order approved the recovery of $125 million of the deferred balance over a ten-year amortization period beginning August 1, 2003. The Summary Order also transferred to ACE's pending base case for further consideration approximately $25.4 million of the deferred balance. The Summary Order estimated the overall deferral balance as of July 31, 2003 at $195 million, of which $44.6 million was disallowed recovery by ACE. Since the amounts included in this decision are based on estimates through July 31, 2003, the actual ending deferred cost balance will be subject to review and finalization by the NJPBU and ACE. The approved rates became effective on August 6, 2003. Based on analysis of the order and in accordance with prevailing accounting rules, ACE recorded a charge of $27.5 million ($16.3 million after-tax) during the second quarter of 2003. This charge is in addition to amounts previously accrued for disallowanc e. ACE believes the record does not justify the level of disallowance imposed by the NJBPU. ACE is awaiting the final written order from the NJBPU and is evaluating its options related to this decision. The NJBPU's action is not appealable until a final written order has been issued.

Regulatory Contingencies

     Final briefs on Pepco's District of Columbia divestiture proceeds sharing application were filed on July 31, 2002 following an evidentiary hearing in June 2002. That application was filed to implement a provision of Pepco's D.C. Commission approved divestiture settlement that provided for a sharing of any net proceeds from the sale of its generation related assets. A principal issue in the case is whether a sharing between customers and shareholders of the excess deferred income taxes and accumulated deferred investment tax credits associated with the sold assets would violate the normalization provisions of the Internal Revenue Code and implementing regulations. On March 4, 2003, the Internal Revenue Service (IRS) issued a notice of proposed rulemaking (NOPR) that is relevant to that principal issue. Comments on the NOPR were filed by several parties on June 2, 2003, and the IRS held a public hearing on June 25, 2003. Three of the parties in the case filed comments urging the D.C. Commission to decide the tax issues now on the basis of the proposed rule. Pepco filed comments in reply to those comments, in which Pepco stated that the courts have held and the IRS has stated that proposed rules are not authoritative and that no decision should be issued on the basis of proposed rules. Instead, Pepco argued that the only prudent course of action is for the D.C. Commission to await the issuance of final regulations relating to the tax issues and then allow the parties to file supplemental briefs on the tax issues. Pepco cannot predict whether the IRS will adopt the regulations as proposed, make changes before issuing final regulations or decide not to adopt regulations. Other issues deal with the inclusion of internal costs and cost allocations. Pepco believes that its calculation of the customers' share of divestiture proceeds is correct. However, the potential exists that Pepco could be required to make additional gain sharing pay ments to D.C. customers. Such additional payments, which cannot be estimated, would be charged to expense and could have a material adverse effect on results of operations in the quarter and year in which a decision is rendered; however, Pepco does not believe that additional payments, if any, will have a material adverse impact on its financial position. It is uncertain when the D.C. Commission will issue a decision.

     Pepco filed its divestiture proceeds plan application in Maryland in April 2001. Reply briefs were filed in May 2002 and Pepco is awaiting a Proposed Order from the Hearing Examiner. The principal issue in the case is the same normalization issue that was raised in the D.C. case. Following the filing of comments by Pepco and two other parties, the Hearing Examiner on April 8, 2003: (1) postponed his earlier decision establishing briefing dates on the question of the impact of the proposed rules on the tax issues until after the June 25, 2003 public hearing on the IRS NOPR;(2) allowed the Staff of the Commission and any other parties to submit motions by April 21, 2003 relating to the interpretation of current tax law as set forth in the preamble to the proposed rules and the effect thereof on the tax issues; and (3) allowed Pepco and any other party to file a response to any motion filed by Staff and other parties by April 30, 2003. Sta ff filed a motion on April 21, 2003, in which it argued that immediate flow through to customers of a portion of the excess deferred income taxes and accumulated deferred investment tax credits can be authorized now based on the NOPR. Pepco filed a response in opposition to Staff's motion on April 30, 2003, in which, among other things, Pepco argued that no action should be taken on the basis of proposed regulations because, as Pepco stated in a similar pleading in the District of Columbia divestiture proceeds case, proposed regulations are not authoritative. The Hearing Examiner will issue a ruling on Staff's motion, although there is no time within which he must issue a ruling. Pepco cannot predict whether the IRS will adopt the regulations as proposed, make changes before issuing final regulations or decide not to adopt regulations. Other issues deal with the inclusion of internal costs and cost allocations. Pepco believes that its calculation of the customers' share of divestiture proceeds is cor rect. However, the potential also exists that Pepco would be required to make additional gain sharing payments to Maryland customers. Such additional payments, which cannot be estimated, would be charged to expense and could have a material adverse effect on results of operations in the quarter and year in which a decision is rendered; however, Pepco does not believe that additional payments, if any, will have a material adverse impact on its financial position. It is uncertain when the Hearing Examiner or the Maryland Commission will issue their decisions.

Standard Offer Service (SOS)

District of Columbia

     On February 21, 2003, the D.C. Public Service Commission opened a new proceeding to consider issues relating to (a) the establishment of terms and conditions for providing SOS in the District of Columbia after Pepco's obligation to provide SOS terminates on February 7, 2005, and (b) the selecting of a new SOS provider. Pepco and other parties filed comments on issues identified by the Commission and some parties suggested additional issues. In its comments, Pepco, among other things, suggested that the D.C. law be changed to allow Pepco to continue to be the SOS provider after February 7, 2005. Under existing law, the Commission is to adopt, before January 2, 2004, terms and conditions for SOS and for the selection of a new SOS provider. The Commission is also required, under existing law, to select the new SOS provider before July 2004. Existing law also allows the selection of Pepco as the SOS provider in the event of insufficient bids. At a prehearing conference held on May 15, 2003, the Commission agreed with the recommendations of all but one of the parties to allow a working group, like the one that has been meeting in Maryland, to develop for the Commission's consideration regulations setting the terms and conditions for the provision of SOS service and for the selection of an SOS provider after Pepco's obligation ends in early 2005. However, by order issued on June 24, 2003, the Commission decided that all participating parties should individually propose, by August 29, 2003, regulations setting forth such terms and conditions. The Commission would then issue proposed regulations by September 30, 2003 and allow initial and reply comments from interested parties to be filed by October 30 and November 17, 2003, respectively.

     On September 29, 2003, the Commission issued draft proposed regulations setting forth terms and conditions for the selection of a new SOS provider(s) and/or the continuation of Pepco as the SOS provider as part of the contingency plan. Pepco and other parties submitted comments on the draft regulations and the Commission is scheduled to issue final regulations by January 2, 2004. The Commission has submitted legislation to the relevant City Council Committee which would provide the Commission with the flexibility to select a SOS provider(s) other than Pepco or Pepco, or perhaps some combination of Pepco and other SOS providers.

Maryland

     In accordance with the terms of an agreement approved by the Maryland Commission, customers who are unable to receive generation services from another supplier, or who do not select another supplier, are entitled to receive services from Pepco until July 2004 and from DPL until May 2004 (non-residential) and July 2004 (residential). Pepco and DPL have entered into a settlement in Phase I of Maryland Case No. 8908 to extend its provision of SOS services in Maryland. The settlement was approved by the Maryland Commission on April 29, 2003. One party has filed for rehearing of the Commission's April 29 order. The Commission subsequently denied that application for rehearing on July 26, 2003. The settlement provides for an extension of SOS for four years for residential and small commercial customers, an extension of two years for medium sized commercial customers, and an extension of one year for large commercial customers. The settlement also provides for a policy review by the Commission to consider how SOS will be provided after the current extension expires. In addition, the settlement provides for SOS to be procured from the wholesale marketplace and that Pepco and DPL will be able to recover its costs of procurement and a return.

     Pepco, DPL, and almost all other parties reached a settlement in Phase II of the case. The Commission approved the Phase II settlement on September 30, 2003. The Phase II settlement provides a detailed process to implement the policies approved in Phase I.

Third Party Guarantees and Indemnifications

Guarantees

     Pepco Holdings and certain of its subsidiaries have various financial and performance guarantees and indemnifications which are issued in the normal course of business to facilitate commercial transactions with third parties as discussed below.

     As of September 30, 2003, Pepco Holdings and its subsidiaries were parties to a variety of agreements pursuant to which they were guarantors for standby letters of credit, performance residual value, and other commitments and obligations as follows:

           Guarantor         

PHI

Conectiv

PCI

Total

Energy trading obligations of
  Conectiv Energy (1)

$190.1 

$32.4  

$  - 

$222.5 

Energy procurement obligations
  of Pepco Energy Services (1)

17.5 

-  

- 

17.5 

Standby letters of credit of
  Pepco Holdings (2)

41.0 

-  

- 

41.0 

Guaranteed lease residual
  values (3)

- 

5.2  

- 

5.2 

Loan agreement (4)

13.1 

-  

- 

13.1 

Construction performance
  guarantees (5)

- 

5.2  

- 

5.2 

Other (6)

  14.9 

   4.4  

 6.0 

 25.3 

  Total

$276.6 

$47.2  

$6.0 

$329.8 

1.

Pepco Holdings and Conectiv have contractual commitments for performance and related payments of Conectiv Energy and Pepco Energy Services to counter parties related to routine energy trading and procurement obligations, including requirements under BGS contracts for ACE.

2.

Pepco Holdings has issued standby letters of credit of $41.0 million on behalf of subsidiaries operations related to Conectiv Energy's competitive energy activities and third party construction performance. These standby letters of credit were put into place in order to allow the subsidiaries flexibility needed to conduct business with counterparties without having to post substantial cash collateral. While the exposure under these standby letters of credit is $41.0 million, Pepco Holdings does not expect to fund the full amount. As of September 30, 2003, the fair value of obligations under these standby letters of credit was not required to be recorded in the Consolidated Balance Sheets.

3.

Subsidiaries of Conectiv have guaranteed residual values in excess of fair value related to certain equipment and fleet vehicles held through lease agreements. As of September 30, 2003, obligations under the guarantees were approximately $5.2 million. Assets leased under agreements subject to residual value guarantees are typically for periods ranging from 2 years to 10 years. Historically, payments under the guarantee have not been made by the company as, under normal conditions, the contract runs to full term at which time the residual value is minimal. As such, Conectiv believes the likelihood of requiring payment under the guarantee is remote.

4.

Pepco Holdings has issued a guarantee on the behalf of a subsidiary's 50% unconsolidated investment in a limited liability company for repayment borrowings under a loan agreement of approximately $13.1 million.

5.

Conectiv has performance obligations of $5.2 million relating to obligations to third party suppliers of equipment.

6.

Other guarantees comprise:

o

Other Pepco Holdings obligations represent a commitment for bond payment issued by a subsidiary of $14.9 million. Pepco Holdings does not expect to fund the full amount of the exposure under the guarantee.

o

Other Conectiv obligations represent a commitment for a subsidiary building lease of $4.4 million. Conectiv does not expect to fund the full amount of the exposure under the guarantee.

o

PCI has guaranteed facility rental obligations related to contracts entered into by Starpower Communications LLC. In addition, it has agreed to indemnify RCN for 50% of any payments RCN makes under the Starpower franchise and construction performance bonds.  As of September 30, 2003, the guarantees cover the remaining $3.9 million in rental obligations and $2.1 million in franchise and construction performance bonds issued.

Indemnifications

     Pepco Holdings and certain of its subsidiaries have entered into various indemnification agreements related to purchase and sale agreements and other types of contractual agreements with vendors and other third parties. These indemnification agreements typically cover environmental, tax, litigation and other matters, as well as breaches of representations, warranties and covenants set forth in these agreements. Typically, claims may be made by third parties under these indemnification agreements over various periods of time depending on the nature of the claim. The maximum potential exposure under these indemnification agreements can range from a specified dollar amount to an unlimited amount depending on the nature of the claim and the particular transaction. The total maximum potential amount of future payments under these indemnification agreements is not estimable due to several factors, including uncertainty as to whether or when claims m ay be made under these indemnities.

(5)  CONECTIV ENERGY EVENTS

     On June 25, 2003, Conectiv Energy entered into an agreement consisting of a series of energy contracts with an international investment banking firm with a senior unsecured debt rating of A+ / Stable from Standard & Poors (the "Counterparty"). The agreement is designed to more effectively hedge approximately fifty percent of Conectiv Energy's generation output and approximately fifty percent of its supply obligations, with the intention of providing Conectiv Energy with a more predictable earnings stream during the term of the agreement. The 35-month agreement consists of two major components: a fixed price energy supply hedge and a forward physical energy sale. The fixed price energy supply hedge will be used to reduce Conectiv Energy's financial exposure under its current supply commit ment to DPL. Under this commitment, which extends through May 2006, Conectiv Energy is obligated to supply to DPL the electric power necessary to enable DPL to meet its Provider of Last Resort (POLR) load obligations. Under the energy supply hedge, the volume and price risks associated with fifty percent of the POLR load obligation are effectively transferred from Conectiv Energy to the Counterparty through a financial "contract-for-differences." The contract-for-differences establishes a fixed cost for the energy required by Conectiv Energy to satisfy fifty percent of the POLR load, and any deviations of the market price from the fixed price are paid by Conectiv Energy to, or are received by Conectiv Energy from, the Counterparty. The contract does not cover the cost of capacity or ancillary services. Under the forward physical energy sale, Conectiv Energy will receive a fixed monthly payment from the Counterparty. This portion of the agreement is designed to hedge sales of approximately 50% of Conectiv E nergy's generation output, and under assumed operating parameters and market conditions should effectively transfer this portion of the company's wholesale energy market risk to the Counterparty, while providing a more stable stream of revenues to Conectiv Energy. The 35-month agreement also includes several standard energy price swaps under which Conectiv Energy has locked in a sales price for approximately 50% of the output from its Edge Moor facility and has financially hedged other on-peak and off-peak energy price exposures in its portfolio to further reduce market price exposure. In total, the transaction is expected to improve Conectiv Energy's risk profile by providing hedges that are tailored to the characteristics of its generation fleet and its POLR supply obligation.

     During the first quarter of 2003, Conectiv Energy had a loss of $92.3 million, which includes the unfavorable impact of a $65.7 million loss resulting primarily from the cancellation of a combustion turbine (CT) contract with General Electric. The loss at the Pepco Holdings level is $31.1 million, substantially lower than the Conectiv Energy loss due to the fair market adjustment recognized by Pepco Holdings at the time of the acquisition of Conectiv as further discussed below. The loss also includes the unfavorable impact of net trading losses of $26.6 million that resulted from a dramatic rise in natural gas futures prices during February 2003, net of an after-tax gain of $15 million on the sale of a purchase power contract in February 2003. In response to the trading losses, in early March 2003, Pepco Holdings ceased all proprietary trading activities.

     Conectiv Energy had entered into contracts for the delivery of seven combustion turbines (CTs). These contracts included one with General Electric for the purchase of four CTs (the GE CTs). Through April 25, 2003, payments totaling approximately $131 million had been made for the GE CTs. As part of the acquisition of Conectiv by Pepco Holdings in August of 2002, the book value related to the CTs and associated equipment (including the payments already made as well as the future payments called for under the contracts) was adjusted downward by approximately 35%, to the then-fair market value. Approximately $54 million of the August fair value adjustment was related to the GE CTs, and another $4 million of the adjustment was related to ancillary equipment. The adjustment was recorded by Pepco Holdings and was not pushed down to, and recorded by, Conectiv.

     Because of uncertainty in the energy markets, the decline in the market for CTs and the current high level of capacity reserves within the PJM power pool, Conectiv Energy provided notice to General Electric canceling the contract for delivery of the GE CTs. The net unfavorable impact on Pepco Holdings of this cancellation, recorded in the first quarter 2003, is $31.1 million, comprised of the fees associated with cancellation of the GE CTs, all associated site development and engineering costs and the costs associated with cancellation of ancillary equipment orders. The unfavorable impact of the cancellation specified above is also net of over $51 million in cash as sociated with pre-payments on the GE CT orders, which General Electric is required to refund as a result of the cancellation. There was a positive cash impact in the second quarter related to this refund. The cancellation of the GE CTs and associated equipment is one of the steps being taken by the company to proactively deal with the risks it would otherwise have in the merchant energy sector.

     After the cancellation of the four General Electric CTs discussed above, Conectiv Energy continues to own three CTs which were delivered in 2002. The CTs have a carrying value of $52.5 million when adjusted to reflect the fair market adjustment made at the time Conectiv was acquired by Pepco Holdings. This fair market value adjustment was recorded by Pepco Holdings and was not pushed down to, and recorded by Conectiv. Due to the decline in wholesale energy prices, further analysis of energy markets and projections of future demand for electricity, among other factors, Conectiv delayed the construction and installation of these CTs. Whether these turbines will be installed and the actual location and timing of the construction and installation will be determined by market demand or transmission system needs and requirements.

(6)  PRO FORMA INFORMATION

     Due to the completion of the merger with Conectiv on August 1, 2002, the accompanying consolidated financial statements include Conectiv and its pre merger subsidiaries operating results commencing on August 1, 2002. Accordingly, as discussed in Note (2) Summary of Significant Accounting Policies and Impact of Other Accounting Standards, herein, Pepco Holdings' consolidated operating results for the three and nine-month periods ended September 30, 2003 are not comparable with the corresponding periods in 2002.

     The following pro forma information for Pepco Holdings for the three and nine months ended September 30, 2002, which is based on unaudited data, gives effect to Pepco's merger with Conectiv as if it had been completed on January 1, 2002. This information does not reflect future revenues or cost savings that may result from the merger and is not indicative of actual results of operations had the merger occurred at the beginning of the period presented or of results that may occur in the future.

Three Months Ended
September 30, 2002

Nine Months Ended
September 30, 2002

(In Millions, except Share Data)

Operating Revenue

$2,127.7

$5,169.8

Net Income

    95.6

   205.1

Earnings per Share of Common Stock

    $.59

   $1.26

     The primary pro forma adjustments were related to interest expense incurred on acquisition debt and interest income on existing funds used to partially fund the acquisition. Pro forma weighted average shares outstanding for each period were 163.4 million shares.

THIS PAGE INTENTIONALLY LEFT BLANK.

POTOMAC ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)

Three Months Ended
September 30

Nine Months Ended
September 30,

   2003   

   2002   

   2003  

   2002  

(Millions of Dollars)

Operating Revenue

   Utility

$518.4 

$516.6 

$1,221.9 

$1,223.4 

   Competitive

- 

91.0 

- 

454.2 

      Total Operating Revenue

518.4 

607.6 

1,221.9 

1,677.6 

Operating Expenses

   Fuel and purchased energy

241.5 

309.3 

540.3 

873.1 

   Other operation and maintenance

59.5 

65.0 

177.1 

239.3 

   Depreciation and amortization

40.1 

37.8 

119.3 

113.7 

   Other taxes

63.2 

56.1 

153.1 

150.3 

      Total Operating Expenses

404.3 

468.2 

989.8 

1,376.4 

Operating Income

114.1 

139.4 

232.1 

301.2 

Other Income (Expenses)

   Interest and dividend income

0.4 

2.8 

2.7 

16.8 

   Interest expense

(16.4)

(23.2)

(53.7)

(85.0)

   Loss from Equity Investments, principally
     a Telecommunication Entity

- 

(0.9)

- 

(2.1)

   Other income

3.3 

2.5 

7.0 

8.7 

   Other expenses

(3.5)

(2.6)

(11.2)

(9.3)

      Total Other Expenses

(16.2)

(21.4)

(55.2)

(70.9)

Distributions on Preferred Securities
  of Subsidiary Trust

2.3 

2.3 

6.9 

6.9 

Income Tax Expense

38.7 

46.4 

68.5 

82.6 

Net Income

56.9 

69.3 

101.5 

140.8 

Dividends on Preferred Stock

1.2 

1.3 

3.7 

3.8 

Earnings Available for Common Stock

$ 55.7 

$ 68.0 

$ 97.8 

$  137.0 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

POTOMAC ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(Unaudited)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2003

2002

2003

2002

(Millions of Dollars)

Net income

$ 56.9 

$ 69.3 

$101.5 

$140.8 

Other comprehensive income (loss), net of taxes

  Unrealized (losses) gains on derivative
    instruments:

    Unrealized holding (losses) gains
      arising during period

- 

(1.1)

- 

1.1 

    Less: reclassification adjustment for
           losses included in net earnings